Reviewing your portfolio

The end of the year is fast approaching and that means it’s once again time to review portfolios, not only in terms of performance but also in terms of strategy and what is actually held in your portfolio.

The first part is fairly simple: how did you fare compared to your benchmarks? I use the Satrix40* exchange-traded fund (ETF) as my benchmark as it gives me a total return that includes dividends paid during the period.

As things stand right now, the Satrix40 has done some 7% for the year, including dividends, and around 50% for three years.

Outperforming the Satrix40

I want my equity portfolio to do better than the Satrix40 over these one- and three-year periods.

I am a long-term investor, so I select these two time frames because the occasional blip that sees me behind my benchmark over one year is not cause for concern.

But if I am consistently underperforming over one year, it means I will be lagging behind over three years as well and I would have to consider that perhaps my strategy is simply not working.

The reality is that if I am unable to beat my benchmark over most three-year periods, I should stop trying and just buy the benchmark – even if I am only a percent or two behind the benchmark, it will make a massive difference over the lifetime of my investment portfolio.

Of course, when you start managing your own portfolio, you may struggle to beat the benchmark; you’re still learning and will very likely make some mistakes along the way.

Truth be told, I’ve been doing this for decades and I still make mistakes.

Start with ETFs

It is critical that new investors’ portfolios include a large slice of ETFs at the core as this shields beginners from their own errors. I always suggest starting with 100% of the portfolio in ETFs.

As the portfolio grows, the share portion can slowly increase, perhaps even to the point where the split between ETFs and individual shares is as much as 50% each.

A higher percentage for ETFs is fine, but I wouldn’t recommend dropping the ETF percentage below 50%, even for experienced investors.

This ETF core provides market certainty, rather than individual stock risk, and that’s always important for both experts and newbies.

*The writer owns shares in Satrix40.

This is an excerpt from an article that originally appeared in the 10 December 2015 edition of finweek. Buy and download the magazine here.